Roland Sennholz, Esq.
There has been much discussion lately of cryptocurrencies, especially Bitcoin, the first and best-known of all such currencies. Investors and futurists alike hail the beginning of a new era, an era where decentralized digital money can be sent around the world in the blink of an eye.
But, while large institutions have been quick to accept the blockchain technology underneath cryptocurrencies, they have been somewhat slower about using the currencies themselves. Despite the fact that they often must move large sums of money across borders, and even though banks charge them sizable fees to do so, they have not yet shown any signs of adopting cryptocurrencies as a means of “cutting out the middleman” when transferring money across borders.
The questions, then, are whether Bitcoin can legally be used to transfer such large sums of money between countries, and whether it can practically be used to do so.
The first question has a myriad of answers depending on the countries and currencies involved. For example, in the United States, Bitcoins are not considered cash. There is no general limit on assets being transferred out of the United States, but a Form 8300 must be filed with the IRS to report any transaction or set of related transactions that results in receipt of a cash payment over $10,000, as long as part of the transaction took place in the United States. It is debatable, for several reasons, if when entity A buys bitcoins in the United States from entity B and then sells them in another country, entity A would need to file a form 8300 at all – though it would still be safest to do so, of course, and entity B would have to file regardless. But, other countries might have other reporting requirements, definitions of “cash” or “related transactions,” or limits on the amount of money that can be taken out of the country at one time, so using Bitcoins as a means of money transfer is likely to incur more legal research costs for large entities or entities making large payments.
The larger the entity, the greater the cost of uncertainty. Thus, the first question ties in with the second question somewhat: is it practical to use Bitcoin as a means of money transfer? Besides the legal uncertainty, there are additional questions of security, cost, and risk.
Assuming proper caution is taken, a Bitcoin transaction is no more likely to be “lost in the mail” or “stolen” than an interbank transfer using the SWIFT system. Because large institutions have the resources to properly secure any computers they might use for Bitcoin transactions, it is safe to say that Bitcoins have the same security problems as any other form of electronic money – no more, no less. Assuming sufficient liquidity, purchasing bitcoins in one location and selling them in another would be a way to transfer funds anywhere in the world in a few hours or less – a significant speed improvement over banks’ methods.
This article does not require knowledge of the technical details of Bitcoin, but it should be noted that Bitcoin transactions are not free. There is a transaction fee each time Bitcoins pass from one user to another, a fee that scales with the number of Bitcoins being sent – but not in a linear or predictable fashion. These fees tend to be much smaller than the fees charged by banks for transferring large sums of money.
Finally, cryptocurrencies are somewhat famous for their volatility. Previously, we assumed sufficient liquidity for a large transaction, but such an assumption cannot safely be made given the current market status. Bitcoin trading volume is still relatively low, meaning that buying or selling a significant number of Bitcoins could have a significant impact on the price of Bitcoin… assuming one can even find enough counterparties to complete a large transaction. Tax specialists may become necessary if significant gains or losses happen while the coins are “in transit,” and again, more legal costs can be incurred.
There is one more consideration: roughly one week from the time of this article’s writing, because of a disagreement in the user base, Bitcoin is scheduled to “fork,” or separate into two groups of users. It remains to be seen whether one fork will win out, or whether Bitcoin will split into two smaller, less valuable cryptocurrencies. In other words, even Bitcoin’s future existence is not fully certain.
Despite the speed and cost advantages of using cryptocurrencies to transfer money around the world, the conclusion must be that at this time, Bitcoin and cryptocurrencies in general are not a good means of removing the middleman. Buy-here-sell-there transfers do not currently meet the needs of most entities doing business on an international scale, which are often larger entities that tend to value certainty over cost. For now, conventional methods remain best.
For learning more about this topic and about the legal matters on cryptocurrencies (including bitcoin) or blockchains (including Ethereum), do contact our attorney Mr. Roland Sennholz at (+1) 202 496 1295 or (+1) 888 820 4430 (toll free), or email us at email@example.com